Chile is strongly impacted by climate variability driven by the El Nino southern oscillation and the Pacific decadal oscillation. These produce multi-year droughts that affect Chilean agriculture, which depends heavily on available water resources. This paper is based on the results of a 6-year study that was carried in the Peumo area of south central Chile, where there is intensive agriculture based on vineyards, orchards and annual crops. In the Peumo area, irrigation has a strong impact on groundwater recharge (22% from irrigation losses, 52% from canal seepage and 26% from rainfall). This research analysed how water management decisions can affect the groundwater system and how agricultural production within the valley would be affected. It was found that decisions such as intensive use of wells and the lining of canals will produce depletion of the water table, affecting low-income farmers who depend on shallow wells.